Bargain hunting was to the fore in almost all asset classes last week as indications that the Fed rate hike might not take place this calendar resulted in a surge in risk appetite.
This made money move out of dollar-denominated assets to other asset classes, including emerging market equity and commodities.
The Sensex and the Nifty too surged with the rising tide of optimism. Both the benchmarks surpassed key resistances to gain around 3 per cent. The short-term trend has turned positive with this rally. But the moot question is, how far can this rally go?
The upcoming earnings season is not going to be too cheerful with the possibility of a flat revenue growth and slight contraction in earnings in the September quarter.
With the earnings growth of the Sensex and Nifty for FY16 set to be adjusted lower, to single digits, there isn’t too much of room for stocks to move higher in the near term, given the current valuations.
The ongoing momentum could lift stock prices a little higher from here, but investors need to be on the watch for sudden reversals.
The positive is that this rally raises the floor of the correction considerably. It is likely that a floor is already in place around 25,000 in the Sensex and 7,500 in the Nifty.
The movement of the dollar is key to determining flows into assets of emerging markets. The dollar index lost slightly over a per cent last week. But chart patterns indicate weakness in the coming weeks. This will be conducive to emerging market assets. According to Bloomberg, global funds have invested a net $1.2 billion into the stock markets of Brazil, India, Indonesia, South Korea, Taiwan and Thailand last week.
Foreign portfolio flows have turned positive in October with foreign investors bringing in a quarter million dollars so far.
These will be closely tracked over the coming weeks to see if this buying fervour continues. Consumer and wholesale price inflation data that is set for release this week will also influence market’s direction.
The Nifty managed to hit 8,180 on Tuesday, but spent the next four sessions in a tantalising sideways move.
The week ahead: The short-term oscillators are losing momentum. That the nifty has managed to move above the 50-day moving average is however a positive.
This is the third part of the move that began from the 7,539 low. Targets for this uptrend are at 8,207 and 8,404.
The Nifty is near the first target now. This is a strong resistance zone and reversal from here can pull the Nifty lower to 7,972 or 7,812. Short-term investors can buy in dips as long as the index trades above the first support.
Strong break beyond 8,225 will bring the next target at 8,400 into play. We need a close above this level to signal a reversal in the medium-term downtrend. Presence of the 200-day moving average at this level adds to the significance of this level.
Medium-term trend: The medium-term outlook stays bearish. The move last week seems to signal that the uptrend from 7,539 is a pull-back in the medium-term downtrend.
A pull-back of the correction, that is on since the 9,119-peak, will have the targets of 8,242, 8,326 or 8,500.
The extent of the pull-back will determine the trajectory of the Nifty for the rest of this calendar.
The rally in the Sensex in the first half of the week took the index beyond the 27,000 level.
The week ahead: The third leg of the move that began from the 24,833 low in the Sensex can take the index to 27,000 or 27,525. In other words, the index faces resistance at the current levels. Reversal from here can take it to 26,317 or 25,761 in the coming sessions. If the index rallies from these levels, next targets are 27,415, 27,525 and 27,714.
Bank Nifty (17,590)
The CNX Bank index is currently poised at an important medium term resistance at 17,730. Downward reversal from this level will mean that the index can move lower to 17,039 or 16,500 in the days to come.
Fall below 16,500 will drag the index to 15,762.
Conversely, if the index continues to move up, it can touch 18,329 or 18,928.
Global benchmarks recorded a smart reversal last week. Many benchmarks managed to reverse an ongoing downtrend to close strongly higher.
The DJ Euro STOXX 50, for instance, gained over 5 per cent and the morning star formation in the weekly chart signals the possibility of a reversal in the medium-term trend.
The Dow’s strong showing last week implies that the up-move that began from the August lows is in its third leg.
This move now has the target of 17,260 and 17,504.
The index will have to move beyond 17,500 to signal that the medium-term trend has reversed.
The recovery in crude oil also lent to the cheer in the market. But the commodity faces immediate hurdle at $53.
The area between $50 and $53 needs to be surpassed before the commodity can move to the band between $60 and $62.
That is likely to be the ceiling for crude, at least for the next 12 months. The floor is likely to be at $38, the recent low.